As per the issue the rule applicable here would be that of an undisclosed principal. Where the agent does not declare agency relationship to the third person these rules are applied. The doctrine which is imposed in order to address such issues is termed as the “doctrine of election”. The doctrine refers to the rule that in situation where a third party enters into a contract with a person who is an agent without having reasonable knowledge that the person is acting under the authority of a principal and gets to know about the identity of the principle latter, such person has the choice at law to enter into the contract with either the agent or the principal. The doctrine originated through the landmark case of Yin Kwan v Eastern Insurance Co Ltd [1994] 2 AC 199. The doctrine had been further applied in Australia under various cases by the courts such as McRae v Bolaro Pty Ltd [2000] VSCA 72 and Immer (No 145) Pty Ltd v The Uniting Church in Australia Property Trust (NSW) (1993) 182 CLR 26 Application of Law 1
Sara has been employed by Terence in her jewelry shop and thus as per the rules of agency actual authority has been provided to her by Terence. Any action of Sara binds Terence to them legally. Sara in the scope of her actual authority provided by Terence gets into a contract with Gabby. Gabby has no reasonable knowledge in the situation that Sara is working as an agent of Terence. After the contract has been duly entered between Sara and Gabby, she has been called by Terence in reation to the contract which Terence as a principal believes that has been formed by him. Gabby replies that she has a contract with Sara. By applying the principles analyzed in the rule it can be predicted that the doctrine of election can be applied here. This is because Gabby did not have knowledge of Sara being Terence’s agent. Through the application of the doctrine of election discussed above it can be concluded that Gabby is not totally correct in her assertion in the issue that she has no contract with Terence. In reality she has the right to chose with who she wants to contract Sara or Terence
The principles of agency law make the principal bound to the actions of the agents. There may be a situation where the agent has exceeded the provided authority and acted in an arbitrary manner against the consent of the principal. This situation may put the third party in a confusing state that whether they can make the principal liable for the actions of the agent or not. In the case of Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 similar circumstances had been brought before the court. The court in this case made a ruling which ensured that the right of any innocent third party is not violated in such situation. It was ruled by the court that where authority is exceeded by an agent the third party would be able to make a claim from the principal where the agent had acted in a way which is in compliance to the normal course of authority provided to him by the principal.
In the same way as Sara, Peter is also Terence’s agent as he has been employed by her. In the normal course of authority Peter is allowed to purchase gold on behalf of Terence. However Terence has instructed Peter not to purchase any further old because the business has adequate stock. However Peter does not comply with the instructions of Terence as purchases from Mary. Mary has entered into a contract with Peter in reliance of his agency relationship with Terence. Although authority is exceeded by Peter, Mary would be able to make a claim from Terence where the Peter had acted in a way which is in compliance to the normal course of authority provided to him by the Terence as per Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd.
The relationship of agency between an employee and an employer comes to an end when the employer terminates the contract of employment with the employee. However there may be a situation in which the ex agent fraudulently enters into a contract with a third party which is still under the apprehension that the agency relationship between the agent and the principal exists. In this situation also the rights of a third party is in a confusing state. Circumstances similar to this situation had been analyzed and addressed in the case of Lonsdale v Howard & Hallam Ltd [2007] UKHL 32. In this case it had been stated by the court that in situation where the agency has been terminated by the principal, it is the duty of the principal to take all reasonable steps to ensure that a third party associated with the business with whom the agent regularly dealt with is notified about such termination and access of the agent in relation to the business is blocked.
As provided by the scenario due to the actions of Peter his employment has been terminated by Terence. However Terence did not block the email access of Peter after termination. Peter used to regularly deal with Gordon on behalf of Terence. He gets into a contract with Gordon using the company’s email access for the purchase of diamonds worth $5000. Gordon had not been notified by Terence about Peter’s termination. Terence has also not blocked Peter’s access to mail. Thus through the application of the case of Lonsdale v Howard & Hallam Ltd it can be concluded that Terence is under the obligation to compensate Gordon for the diamonds as Gordon relied on the agency to get into the contract and Terence did not act reasonably.
Although the establishment of the principle of separate legal entity had been done in the case of R v Arnaud (1846) 9 QB 806, the landmark ruling in company law in relation to the issue had been provided by the ratio decidendi in the case of Salomon v A Salomon & Co Ltd [1896] UKHL 1, [1897] AC 22. In this case the defendant sold a business he owned to a company which had been incorporated by him lawfully under the Companies Act in UK. The registration of the company was completed and the members were the defendant and his family. The defendant owned debentures of ?10,000 and fully paid shares. The company becomes insolvent as the business declined and went into liquidation. There was an attempt by the liquidator to make the defendant liable in personal capacity by providing the argument that the transaction was a fraud in relation to the creditors of the company and no benefit must be provided to the defendant. A claim had been made that the company was a mere agent of the defendant and it is his liability to indemnify the company in relation to the incurred debt. The house of lord held in this case that the defendant did not owe any liability to the creditors and even though the business which the defendant carried out before the formation of the company was same after the formation, the business become different from the defendant when the company was formed.
However in the case of Woolfson v Strathclyde Regional Council [1978] UKHL 5 the court ruled that the corporate veil may be lifted to make owners liable in personal capacity. This action will only be indulged into by the court of the company has not been incorporated lawfully or there was a fraudulent or deceptive purpose which the members had in relation to registering the company.
The scenario states that Roger Smith is the owner of 92 out of hundred shares in a company named United chemicals. The company had been registered in the year 2009. Mrs Smith who is the wife of Roger is the Company secretary of the company. She holds only eight shares in the company. The company has indulged into a contract with industrial machines for the purpose of purchasing a phosphate processing machine. The contract was with the company as it had been executed by its managing director on its behalf. As per the contract the company has the obligation of paying $60000 in three installments. However after the payment of the first installment the business of the company feel and it was not able to make further payments. In relation to the default Machine ltd wants to sue Roger as they know he is rich. However as analyzed above a company has a distinct identity form its owners as per Salomon v A Salomon & Co Ltd. The contract was formed between Machine Ltd and United Chemicals Pty Ltd. Further there is no fraud in formation of United Chemicals Pty Ltd. Thus it is United Chemicals Pty Ltd who can be sued and not Roger as per Woolfson v Strathclyde Regional Council
No, the intention of Industrial Machines Ltd to directly sue Roger in personal capacity for the amount owed by United Chemicals Pty Ltd will not succeed
Legal Issue 2
Is the rejection done by ASIC supported by any relevant legal principles?
It has been provided through the provision of section 5B of the Corporation Act 2001 (Cth) that Australian Securities and Investment Commission has the power to administrate the provisions of the Act.
A company may be registered by following the procedure under section 117 of the CA. under the section the person who seeks registration has to apply to the ASIC. Under such application the person has to denote specific details about the proposed company. In such details, information in relation to the share capital of the company also needs to be provided and the shares held by the directors also need to be provided. Under section 9 of the CA provisions in relation to the meaning of directors have been provided. The section states that any person even if they have not been registered as directors where they have control over the affairs of the company.
It has been stated through the situation that Roger for the purpose of expanding his business wants to carry out business in relation to explosives. Any person who has a criminal conviction is prohibited under the commonwealth legislation to be granted with an explosive license. As roger had been imposed with criminal conviction he wants to form a new company where he holds 99 shares. While making the application Roger being the associate of the company and also its directors would be deemed to be a part of it. Thus the ASIC can rightly rely on the commonwealth legislation and deny the registration of the company as roger being its Managing director does not have legal rights to obtain a license to carry out business in relation to explosives.
Conclusions
Thus the ASIC can rightly rely on the commonwealth legislation and deny the registration of the company
Corporation Act 2001 (Cth)
Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480
Immer (No 145) Pty Ltd v The Uniting Church in Australia Property Trust (NSW) (1993) 182 CLR 26 Application of Law 1
Lonsdale v Howard & Hallam Ltd [2007] UKHL 32
McRae v Bolaro Pty Ltd [2000] VSCA 72
R v Arnaud (1846) 9 QB 806
Salomon v A Salomon & Co Ltd [1896] UKHL 1, [1897] AC 22
Woolfson v Strathclyde Regional Council [1978] UKHL 5
Yin Kwan v Eastern Insurance Co Ltd [1994] 2 AC 199
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